As the pharma sector across the globe is transforming and with new players joining the generics market, India will have to adopt a different strategy to retain and enhance global market, writes Suhayl Abidi, Research Advisor, GOG-AMA Centre of International Trade
The companies with the brightest prospects are those that know where to find pockets of growth, how to capture that growth now and in the future, and how to build a growth engine for sustainable success
— McKinsey & Co, 2019
We have seen in Part I- a scenario of global opportunity opening up to India’s API industry, in time it can overtake our formulations exports and also displace China’s API export markets. We have also seen in Part II that China is flexing its muscle in the global formulation market, starting with Africa and should be viewed as a serious threat to India’s large export of generic formulations. In addition, competition to retain existing markets and go into new markets will also increase from countries such as Bangladesh, generic arms of MNCs, Turkey, Egypt etc.
What can India do? The present model of business as usual with manufacturing concentrated in India and exporting worldwide has been very successful with 2019-20 exports of $19 billion and growing at a rate of 15-25 per cent. In future, with at least 50 countries putting up new projects, scaling up their production and generics become commoditised, we may not be able to sustain this growth and prices will come under pressure. India has to adopt a different strategy to retain and enhance global market. I suggest a novel strategy with three elements. In my opinion, if we put our combined efforts, that is joint strategy with government and its institutions, drug & export federations and associations and companies involved in drug manufacturing & supply chain, we can outflank Chinese threat as well as ensure India’s generic domination throughout the world.
The strategy has three elements:
- Greater control over global end-to-end supply chain
- Moving manufacturing of common drugs starting with WHO list of Essential Drugs overseas.
- Intensive development and export marketing of bio-generics
We will discuss each of these in greater detail.
1. Greater control over end-to-end supply chain
To grasp this issue, we must first try to understand the problems of drug supply facing SSA because within each problem there lies a hidden opportunity. Healthcare is the third most important development issue as announced by African Union. This includes both healthcare services such as hospitals and medicine supply.
As we have seen in Part II of this series, over 20 countries in SSA have ambitions and plans for local production. Since the formation of African Continental Free Trade Area (AfCFTA) and rising GDPs, the size of markets is becoming larger and making the production on world-scale plants (1 billion tablets & capsules) feasible. Many countries such as Tanzania, Kenya, Uganda, Ethiopia on the East Coast and Nigeria, Ghana, Ivory Coast on the West coast of African have announced large plans and attractive incentives for localisation of production. Indian companies should seize this opportunity and not allow Chinese companies to expand their reach as they have done in Ethiopia.
The two principle problems which stem from broken supply chain system are:
- Frequent shortages and thereby profiteering by middlemen
- Large influx of counterfeit drugs
Indian government should realign its aid program in Africa to provide higher amount for healthcare sector in Africa such as establishing hospitals and pharmaceutical plants in Joint Venture with African entrepreneurs. As many African countries are moving towards greater democracy, “visible” aid such as hospitals & medical supply would fetch greater goodwill among African people and governments than “invisible aid” such as power distribution. Every day, thousands of Kenyans travel between Nairobi and Mombasa on Chinese build railway. Aid in healthcare also helps in increasing Indian export of medical equipment and devices, APIs, pharmaceutical machinery and services on a long-term basis.
Indian government should promote frugal healthcare models in Africa such as Aravind Eyecare System or Narayan Hryudalaya’s coronary care or Sahaydri Multihospital Chain in Maharashtra. This will not only promote Indian medical exports but also create very visible goodwill.
Distribution: Inadequate regulatory oversight, risking the entry of substandard and counterfeit medicines, as well as weak infrastructure in cold chain, ordering and transport can be key challenges for distribution of medicines. Lack of expertise in stock management, poor education and irregular energy supply are major contributors. Challenges also include fragmented and under-capitalised wholesaler and distributor channels, expensive credit and variable quality among local distributors. All these constraints mean frequent shortages, high mark-up on prices and erosion of revenue. For the public sector, that is government healthcare system, it also means pilferages (which has been estimated by government auditors in various countries to be up to 25% of supplies). These are smuggled and mixed with counterfeit products to be sold in rural and cross-border trade. More and more governments are moving out of direct delivery of healthcare services in favour of medical insurance and private healthcare.
Under-capitalisation of distributors create frequent shortages resulting in 200-500 percent price rise.
The second major problem in widespread influx of counterfeit drugs. An estimated 40 per cent of worldwide counterfeit drugs are sold in Africa, part of a larger multi-billion dollar global fake drug trade. Unlicensed drug outlets are also rife. In Kenya, the non-profit PSP4H estimates that 8,000 of the country’s 12,000 pharmacies operate without a license. The Indian government can use part of its aid program in Africa which is approx. $1.3 billion per year to open schools for pharmacists in various countries up to diploma level and entrepreneurship program in conjunction with UNDP, these students can thus be trained to run pharmacies. The Indian government’s Janaushadhi scheme which today runs over 4,000 retail pharmacies in the country can be a viable model.
All these constraints in Africa make a compelling case for a pharma company operating in Africa, not only to manufacture low-cost medicines but also ensure an ironclad supply chain to derive double digit growth, not possible anywhere else.
A company can start with establishment of a distribution warehouse for imported Indian medicines supplemented with medical/surgical supplies at a centrally located Free Trade Zone on the East Coast of Africa such as Nairobi FTZ. A reputable logistics company can be roped in to manage this part of the system. The Government of India provides several subsidies through Market Access Initiative (MAI) Scheme. These include subsidy for establishing warehouses abroad, conducting market surveys/studies and opening of showrooms. The warehouses which should be designed as per WHO Warehousing Guidelines should have facility for break-bulk re-packing and printing. This would enable flexibility in storing bulk supplies and make retail packs based on national and regional rules & regulations, both for institutional as well as retail sales. Bulk supplies from India can be brought through reefer containers further lowering the cost of transportation.
Establish a B-to-B platform for direct sales to distributors and institutions from this warehouse. The last mile delivery should be done through national warehouses and exclusive pharmacies. There is a large Indian origin population in East Africa which are largely involved in trade and a viable & sustainable exclusive distribution & retail chain can be created with their involvement. Any initiative which takes care of broken supply chain and counterfeit drugs will find support in African governments and other national & international institution involved in healthcare.
There are many variations in this concept of integrated supply chain which can be examined to maximise profitability and sustainability of the business. Financial assistance & subsidies from various export promotion schemes of Government of India can be built into the financials. It is essential that medical devices/consumables/supplies should be stocked as well to provide a higher margin of profit to wholesalers and retailers as well as binding the network more strongly with India.
2. Moving manufacturing of common drugs as listed in WHO list of Essential Drugs overseas.
In SSA, only Kenya, Nigeria, and South Africa have a relatively sizable industry, with dozens of companies that produce for their local markets and, in some cases, for export to neighbouring countries. Local producers also play in a limited range of the regional value chain. Almost all of them are drug-product manufacturers—that is, they purchase active pharmaceutical ingredients (APIs) from other manufacturers and formulate them into finished pills, syrups, creams, capsules, and other finished drugs. Up to a hundred manufacturers in SSA are limited to packaging: purchasing pills and other finished drugs in bulk and repackaging them into consumer-facing packs. Only three—two in South Africa, and one in Ghana—are producing APIs, and none have significant R&D activity.
To consider the case of local production, when imported, the drug’s landed price in Ethiopia consists of the manufacturer’s price in India plus a more-than-20-percent mark-up as a result of freight, duties, and value-added tax. If the same drug were manufactured in Ethiopia: the raw materials would still be imported, but the import costs would be lower because of their relatively low value. Adding the local conversion cost due to lower manufacturing efficiency and the producer margin to the total leads to a price that is higher than in India, but the lower transport cost to reach the distributor means that the locally manufactured product is still more affordable at the point of entry into the local supply chain. In fact, for a range of products, including tablets, capsules, and creams, costs for most drugs produced in Ethiopia and Nigeria tend to be about 5 to 15 percent lower than the landed price of imports from India.
Local manufacturers often have the incentives and resources to introduce newer generation generics into African markets. In Ethiopia, when one local player became the first in the country to produce a newer-generation antibiotic, the government added it for the first time to the list of products available to public health facilities.
Much of SSA being categorised as Least Developed Countries (LDC), they can steadily increase their exports just had Bangladesh had done.
With building of world-scale plants as China has done, the lower cost manufacturing advantage in exporting from India is substantially reduced. Adding to it the 25% price advantage and 15% advance payment to locally produced drugs in Ethiopian government tenders, the local drugs become very much price competitive and this is the model which is likely to be adopted by Chinese companies, starting with Ethiopia.
Once substantial domestic capacity is added, the governments will, most likely ban or restrict the import of such drugs. There is a proposal before Kenyan government to ban import of eight drugs in 2020. Therefore, it is imperative that Indian companies set up large-scale globally competitive plants in select locations in SSA.
It is my suggestion that Indian pharmaceutical industry, in association with the Indian government and its export agencies such as EXIM Bank set up two pharma zones in designated Free Trade Areas, one each on the East coast and West coast of Africa.
These zones would not only produce drugs for the entire African continent, warehouse drugs imported from India and export to Middle-east and Eastern Europe.
The two sites are Djibouti on East coast and Togo on West coast, both countries are politically stable and have ambitions and plans to mirror the success of Dubai as logistic hubs. These countries, with Free Trade Zones & Free Ports are located in the midst of the largest markets in their respective region and tied to the region through regional trade agreement which allow free movement of goods. Djibouti with borders sharing with large markets of Ethiopia (port for landlocked Ethiopia and connected with a newly built railway line) and Kenya is a member of Common Market for Eastern & Southern Africa (Comesa), a market of 21 countries with a population of 500 million and a pharmaceutical market of $5 billion. This is one of the fastest growing regions of Africa. Djibouti is also a springboard for entry into the markets of Mediterranean region, North Africa and Middle-east region. Togo, on the other hand is a member of Economic Community of West African States (ECOWAS), comprising 15 countries and a market of 350 million people and 25 per cent of total GDP of Africa. Togo borders two of the largest markets on the west coast, Nigeria & Ghana. Ghana, in 2018 was the fastest growing country in the world with a GDP growth of above 8 per cent. The current pharmaceutical market of $3.5 billion will rise to $5.3 billion by 2027(Fitch Solutions). Togo, has an additional advantage of a launch pad for Latin American and North American markets. However, Free Trade Zones in Kenya & Ghana are two other alternative sites. Indian companies are already well-entrenched in the third region of SSA, that is the Southern African Development Community (SADC). However, the future lies with countries north of South Africa. As AFCFTA takes practical shape over the next 3-5 years, much of Africa will become part of a common market.
Within regional economic communities, it is a sound alternative strategy to manufacture in smaller countries which have created better “Doing Business” environment than their bigger neighbours. For example, many auto parts companies have located their plants in Botswana to feed South African automotive industry due to its lower costs and peaceful labour environment compared to its larger neighbour. Both are members of Southern African Customs Union.
Due to regulatory reforms, Togo jumped its “Doing Business” ranking by 40 to 97 while Djibouti jumped 55 ranks to reach 99 in 2019.
Latin America should be the next continent for India to locate its pharmaceutical zones. There are two Customs Union in place at present. Mercosur trading bloc with six countries including Brazil and Pacific Alliance with four countries including Mexico & Colombia. These blocs combined constitute 81% of South America’s GDP and 90% of its population. These zones should comprise both production and distribution in JV with strong local companies. Indian companies such as Hero Honda are already manufacturing in Colombia for the entire South American market.
Further, the Indian industry should expand in a similar way in Gulf Cooperation Council, especially Oman and Eurasian Economic Community which comprise Russia and four other countries.
This expansion in the next 5-10 years should result in an investment of about $5 billion but would ensure long-term export of complex generics, bio-generics, APIs, excipients, machinery and services as well as highly profitable local production. A likely model for Africa is given below which on a smaller scale is already in operation in Africa. One company which follows this model imports generics from its plant in India, and distributes through seven national warehouses and 14 exclusive retail stores, thus ensuring total control over its operation and high profitability.
This model not only ensures supply of quality but affordable Indian origin medicines and medical consumables but also checks counterfeit drugs. This should be welcomed by African governments and institutions engaged in healthcare.
According to Warren Buffet, moats generally manifest themselves in pricing power. A company that can’t raise prices is unlikely to have a strong moat.
The more complex the value chain, the more difficult for the competitors to imitate the first mover. China has great strength in manufacturing which it can deploy in Africa and Latin America. Any strategy based simply on low-cost manufacturing at home and exporting it will not be profitable and sustainable in the long run as soon others will join and compete on price alone.
A strategy based on service will be more difficult to imitate. It is complex in nature and depends upon detailed study on building the right strategy followed by intricately manoeuvred execution. Both strategy and execution have to be agile and adaptable to move with the changing business African environment. It should be resilient to manage unexpected downturns.
The apex bodies of Indian healthcare industries such as Indian Pharmaceutical Alliance (IPA), Indian Drugs Manufacturers Association (IDMA) and Association of Indian Medical Device Industry (AIMED) should commission a consultant to deliver an integrated marketing & supply-chain strategy for Africa which can be presented to the Indian government for support. The government looks at pharmaceutical as one of the pillars of value-added exports and should back any such initiative to seize opportunities abroad.
3. Intensive development and export marketing of bio-generics
Until now, the Indian pharmaceutical industry’s success has largely been due to production of generics drugs. The next growth area for Indian pharmaceutical industry can be the bio-generics sector and the global market is expected to increase from US$5.95 billion in 2018 to US$23.63 billion by 2023 and $60 billion by 2030 according to a report by Markets and Markets. This represents a compound annual growth rate (CAGR) of 31.7 per cen per cent and more than doubles the 2017 market value estimation of US$10.9 billion. Geographically, the biosimilars market is dominated by Europe, followed by Asia, North America and the rest of the world; Europe is expected to hold the largest share of the biosimilars market at least until 2023. Growth of the biosimilars market in Europe is primarily driven by the need to reduce healthcare costs, the expiration of biological patents and the arrival of new biosimilars, as well as the increasing incidence of chronic diseases. The Asian market is projected to grow at the highest CAGR from 2018 to 2023.
Over the last few years, there has been a shift in the landscape of blockbuster medicines from small molecule drugs to biologicals which is worth approximately $276 billion today. While small molecule drugs still dominate the global pharmaceutical market in terms of numbers, seven of the top 10 best-selling medicines in 2018 were biologicals compared with only three in 2008. The high and rising cost of biologicals is putting a strain on healthcare budgets, therefore, biosimilars are becoming increasingly important as more patents on originator biologicals expire. The biosimilar market is also rapidly growing; however, it accounts for less than 2 per cent of global sales of biologicals (4.6 per cent of European sales). The top 100 product sales share of biotech and conventional products is forecast to stabilise at around 50/50 split in 2024.
The competition in bio-generics space is much less than conventional drugs but some countries are taking a big stride in its development. Both Samsung and Fujifilm have planned multi-billion dollar investment for bio-generics. Iranian companies have made great strides in the development of biologics and some 12 drugs are in the market compared to 70
Turkey is getting its first locally produced mAb via an Iranian biosimilar and the $100 million plant it built there in collaboration with Iran’s CinnaGen Pharmaceuticals. The operation is slated to make a “rare drug,” which are expected to save Turkey about $150 million in imports in the first year. According to the CinnaGen website, the company makes a biosimilar of AbbVie’s arthritis fighter Humira in both juvenile and adult doses.
There are a few pharma companies in MENA region such as Jordan’s Hikma which have entered the bio-generics industry. Hikma is in collaboration with Celltrion for three of its biosimilars — Herzuma, Truxima, and Remsima. The same goes for Iran’s CinnaGen which, in September 2018, became the first mAb manufacturer in the region to receive GMP certification from the European Medicines Agency (EMA). However, there is still much more ground to cover before there is a thriving biologics and biosimilar industry in large parts of the world.
China’s pharmaceutical industry which is 35 per cent government owned \\is working towards its vision of becoming a healthcare technology powerhouse in the next two decades. Nobody should doubt the speed at which the Chinese move forward, though the first indigenous bio-generic of Genetech/Roche’s Rituxan received approval only in February 2019. The Chinese bio-generics market, according to a Mckinsey study, can grow from $2 billion in 2018 to $8 billion by 2025. According to the Chinese regulator, the NMPA, China has over 200 biosimilars in development stage.
If Indian pharma industry should ensure that the success of generics is mirrored in bio-generics. The industry, with the support of government will have to take a long-term view, about 8 to 10 years, to capture these opportunities, since investments in these technologies have high gestation periods. It may also need conducive investment environment in the domestic market to be able to do so. This requires a change in mindset of Indian companies and the smaller companies should deploy “CO-CO” as a strategy to gain the size and investment required to compete in the global market. “Cooperation” in development, both within the Indian industry & strategic tie-up with overseas companies and “Competition” in the global market. The government should look into the viability of establishing a Centre of Bio-generics Development which can license out new products for different markets.
New opportunities and threats require novel solutions which, in the words of Warren Buffet is exemplified by the creation of an economic moat, difficult to imitate by the competition. I am confident that the Indian pharmaceutical industry will rise to the occasion and strive to dominate the global market for APIs, generics and bio-generics well into the distant future.